![]() This is particularly the case considering that today’s asset-price and credit-market bubbles have been premised on the assumption that ultra-low interest rates will last forever. It would also risk precipitating an emerging-market debt crisis that could add to world financial-market instability. The big fly in the ointment with a Fed go-it-alone approach, however, is that unduly raising interest rates would risk bursting asset-price bubbles both at home and abroad. This would seem to be especially the case since the Fed has been allowing interest rates to become increasingly negative in inflation-adjusted terms at a time that the economy has been receiving its largest peacetime budget stimulus on record. It could do so in the time-honored way of raising interest rates by an amount sufficient to bring aggregate demand back in line with aggregate supply. To be sure, the Federal Reserve acting alone could put an early end to inflation. Meanwhile, instances of credit-market excesses are to be found in the vast amounts of money that have been loaned at very low interest rates to highly leveraged companies and to emerging-market economies with dubious ability to repay. housing prices are now above their pre-2006 housing-bust levels even in inflation-adjusted terms. The only time valuations have hit that level in the past 100 years was in the year 2000. equity valuations are now at nosebleed levels. and world asset price and credit markets are characterized by bubble-like conditions. At the same time, as a result of the Fed’s zero-interest rate policy and around $5 trillion in bond purchases over the past eighteen months in response to the pandemic, both U.S. ![]() Headline consumer price inflation is now running at 6.8%, the fastest pace of increase in the past three decades. economy is suffering from a twin good-and-services inflation and asset-price inflation problem of meaningful proportions. ![]()
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